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Avon rating downgraded on currency weakness and CEE gloom

By Simon Pitman , 10-Mar-2009
Last updated on 10-Mar-2009 at 17:54 GMT

Citing currency weakness and overexposure in the Central and Eastern European (CEE) market, an analyst has downgraded Avon's outlook for 2009.

BMO Capital Market senior research analyst Connie Manneaty said she was lowering Avon's rating from 'Market Perform' to 'Underperform' because of clear evidence that the financial crisis is accelarating in the CEE region.

The region has been hard hit by currency instability, which has most recently led to Standard & Poor’s downgrading the economic expectations for both Latvia and the Ukraine, serving to increase speculation about the region’s financial viability.

CEE economic outlook is worsening

Manneaty said that Avon’s performance in the CEE region is likely to get progressively worse as the year goes on, which will have a serious impact on its performance as an estimated 16 percent of sales are derived from the region.

The analyst also pointed to the fact that the strong US dollar is likely to further impact results from its interernational markets, which in recent years have increasingly concentrated on devoloping regions.

In total an estimated 70 percent of the company’s total annual sales of $10.7bn come from international markets.

Currency weakness will hit Latin American markets

Manneaty made specific reference to the Latin American markets, where Avon has invested particularly heavily in recent years, stating that currency weakness would be a particular problem there.

"We now believe that the negative impact from foreign exchange translation and transactions will offset the positive impact of lower commodity costs and higher savings by a greater-than-expected amount,“ said Manneaty.

When news of the downgrading broke on Monday, Avon’s share price dipped below the $15-mark to reach a new year low of $14.40, bouncing back to $15.64 by mid-day trading on the NYSE today.

Avon reacts by accelarating restructuring

Avon has already introduced measures aimed at easing the economic crisis, having extended its restructuring program to cut its workforce by as many as 3,000 people during the course of the next four years.

Although Avon’s most recent fourth quarter results showed that sales had dropped 9 percent, aggressive restructuring helped to boost profits by 80 percent.

The company reported that sales fell to $2.8bn, compared to $3bn in the corresponding quarter ending 31 December, 2007, while net income increased to $232.4m, up from $128.9m in the same period last year.

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